Multi-national companies (MNCs) came as a blitzkrieg in the mid-90s to snap up companies in India and promoters were only too happy to see cash flowing into their bank accounts. The wave of acquisitions continued till around five years ago and then slowed down as promoters of many large Indian groups had already exited their flagship firms or made it clear that they were in for the long haul. And the small firms were either too small to catch the acquirers’ fancy or the promoters found out that it made sense to scale up further before calling it quits. Now the hunters are back, with money bags bursting at the seams.
Sample this: Reckitt Benckiser paid around 30 times Paras Pharma’s earnings before interest, tax, depreciation and amortisation (EBITDA) for 2009-10, almost twice the multiples at which peer group firms are trading at. NYSE-listed Abbott Labs inked a deal to acquire domestic formulations business of Piramal Healthcare, for an upfront payment of $2.12 billion plus $400 million annually for the next four years, paying up to 40 per cent premium over its market price.
International Paper’s acquisition of midsize paper firm Andhra Paper came at such a high valuation that analysts paused to wonder if it was to re-rate the whole industry and so on.
“Huge premium in valuation is explained by three things: India, as a market, is of high interest; the strategic synergies in a particular business or asset and also in all parts of the world and one has to pay a control premium for an acquisition,” said Nick-Paulson Ellis, country head, India, for Espirito Santo Securities (formerly Execution Noble), an international investment banking group based out of Mumbai.
The obvious growth opportunities apart, buying companies in developing world also makes economic and strategic sense. This is because they are largely in better shape than their industrialised peers, carrying less debt or toxic assets.
“From a foreign MNC standpoint, the feeling is almost as if those who are not yet meaningfully present in India have something fundamental missing from their portfolio. Therefore, a high entry premium for a scale asset is a natural corollary,” said Vivek Gupta, Partner, BMR Advisors, a boutique tax and advisory firm.
For Private Equity Firms, It is Good News & Bad News
First, the good news. The interest of MNCs in India translates into great returns for LPs and a carry for the fund managers working in India.
So, when Reckitt Benckiser Group Plc. acquired private equity-controlled Paras Pharmaceuticals for Rs 3,260 crore or $726 million, it spelt huge returns for the PE funds. Assuming returns in proportion with its stake, Actis made three times its original investment in four years, raking in $457 million through this deal while Sequoia’s 7-8 per cent stake brought around $50 million.
But there is also a flip side to it. Such motivations are only increasing the aspirations of the Indian promoters who are now asking for sky-high valuations for their businesses or assets. And this is certainly proving to be a deterrent for seasoned private equity deal-makers.
“Doing a deal has become extremely difficult. Promoters are now driving deals based on their own terms and valuations,” said S. Harikrishnan, General Partner, Avigo Capital, an SME-focused, mid-market private equity firm.
While it raises the bar from a straight, fresh investment point of view, it can also derail the rare buyouts happening in India as MNCs are expected to be much more aggressive in snapping businesses and buyouts may become a much more competitive game for PE firms.
For instance, TPG Capital, the global private investment firm, was believed to be in an advanced level of talks with Luminous Power Technologies Pvt Ltd (which makes inverters, appliances and batteries) for buying a significant stake in the company. But it was pipped to the post by a strategic acquirer.
French electrical engineering and power management company Schneider Electric SA snapped up 74 per cent of the inverter and battery maker for around 215 million euro or $310 million in June this year.
Assets, But No Liability Please
A notable aspect of these acquisitions, particularly for listed companies, is the fact that MNCs are choosing to buy business assets of local public-listed firms, rather than an equity stake in them.
While asset purchase allows MNCs to cherry-pick what they want, it also allows them to sidestep the rigours of going through an open offer and, thereafter, the regulatory requirements of having a public-listed firm in the country.
“Every transaction has its own merits. For strategic acquirers, more than the PE comparable in the stock markets, what matters is the inherent growth and the profitability to accrue from this acquisition in near future,” said Pranay Bhatia, Partner, ELP, a Mumbai-based law firm.
Incidentally, it works well for the promoters that be. One gets to keep his company while selling a part of the firm, often at many times the overall value of the company itself.
In 2010, French electrical switch company Legrand picked up the switchgear division of Indo Asian Fusegear for a total consideration of Rs 600 crore. This was 3.5 times more than the market cap of the firm of about Rs 175 crore which, incidentally, is backed by ChrysCapital chief Ashish Dhawan.
Security systems firm Zicom sold its two key units to Schneider in 2010 for Rs 225 crore, much more than its market cap. Certainly, the MNCs know something that an investor in the street doesn’t.
MNCs are buying assets for various reasons. For one, there is less time spent in the legal formalities in case of an asset, as opposed to a company. Often, MNCs also don’t want to take the liabilities of the holding company. “In listed company scenario, it is often easier not to have to deal with the shareholders and buy assets, instead of the company,” Gupta of BMR Advisors added.
It is, however, difficult to establish if such strategies can prove to be a win-win situation for all the stakeholders. If creating value for shareholders is the key in any transaction, most of the deals have failed to do that and share prices for most of these companies have crashed post-acquisition, leaving with notional loss for many minority retail shareholders.
For instance, Indo Asian Fusegear Ltd, which was trading around Rs 146.33 in July, 2010, is now hovering around a price of Rs 79.10. This only goes to show how the minority shareholders have not gained much from such transactions.